"Tying It All Together" with David Rosenberg

Tyler Durden's picture

Our discussions (here, here, and here) of the dispersion of deleveraging efforts across developed nations, from the McKinsey report last week, raised a number of questions on the timeliness of the deflationary deleveraging process. David Rosenberg, of Gluskin Sheff, notes that the multi-decade debt boom will take years to mean revert and agrees with our views that we are still in the early stages of the global deleveraging cycle. He adds that while many believe last year's extreme volatility was an aberration, he wonders if in fact the opposite is true and that what we saw in 2009-2010 - a double in the S&P 500 from the low to nearby high - was the aberration and market's demands for more and more QE/easing becomes the volatility-inducing swings of dysphoric reality mixed with euphoric money printing salvation. In his words, perhaps the entire three years of angst turned to euphoria turned to angst (and back to euphoria in the first three weeks of 2012?) is the new normal. After all we had angst from 1929 to 1932 then ebullience from 1933 to 1936 and then back to despair in 1937-1938. Without the central banks of the world constantly teasing markets with more and more liquidity, the new baseline normal is dramatically lower than many believe and as such the former's impacts will need to be greater and greater to maintain the mirage of the old normal.


Meet The New Paradigm, Same As The Old Paradigm

Tying It All Together.

The people I speak to tell me that the extreme volatility and general market weakness last year was the aberration. The normal was the bounce we saw in 2009 and extension into 2010 — even though that extension was in dire need of a late-year round of QE2 intervention.

I'm actually wondering if it isn't the opposite. That last year was normal and what we saw in 2009 and 2010 — a double in the S&P 500 from the low to the nearby high —was the aberration.

Or maybe, just maybe, the entire three years of angst turned to euphoria turned back to angst (and back to euphoria in the first three weeks of 2012?) is the new normal. After all, we had market angst from 1929 to 1932 then ebullience from 1933 to 1936 and back to despair in 1937-38.

If there is one thing to take away from the McKinsey report, it is that we are into a completely different set of post-recession realities than what we were accustomed to through the post-WWII era. The prior 10 recessions before the epic 2007-09 downturn were nothing more than brief and small corrections in real GDP in the context of what was a generational secular credit expansion — an expansion that went asymptotic from 2002 to 2007. But make no mistake — this was a multi-decade debt boom and will take years to mean revert. As the McKinsey report concluded, we are still in the early stages of the global deleveraging cycle, and once it starts in the government sector, absent a notable upturn in private sector spending, recession risks will remain acute, if not a reality.

This is the lens from which we have to assess the economic base-case scenario, understanding that the range of outcomes are extremely wide, but the probabilities still skewed more towards the downside. What is to be considered "normal" should not be through the prism of the post-WWII period, when the secular credit expansion ensured that recessions were short and shallow and expansions long and strong—to the extent that central banks started to believe their own press that they had managed to defeat the business cycle and with that in mind, coined their own term of success: "The Great Moderation".


Today's "normal" is seen through the prism of the McKinsey report — what life looks like after a post-credit bubble collapse. And so far, what we have seen in the markets and the macro economic data—an initial sharp bounce, then a stalling out, wide fluctuations, ultra-low policy rates and bond yields, endless signs of economic fragility and recurring double-dip risk — is indeed quite normal in this context.

This by no means suggests that investment themes have vanished and that you can't make money and preserve capital in this sort of environment. There were plenty of ways to generate returns in 2011 —they just didn't really exist that much within the equity market universe. But let's go through where to prudently put money to work in the current and prospective backdrop, since we have to face up to the reality that you will not build up wealth or savings in T-bills, bank deposits or money market funds at today's near-zero percent interest rate environment:

1.    Market volatility is part and parcel of every post-bubble deleveraging cycle. This means an ongoing focus on long-short relative value strategies that have little directional exposure with the overall market but take advantage of the inherent mispricing across sectors during these periods of heightened volatility.

2.    Deflation trumps inflation as the primary trend in a deleveraging cycle. This means an emphasis on defensive sectors with earnings stability and predictability characteristics. It also means a focus on squeezing as much income as possible out of the portfolio. This is why "income equity" strategies make so much sense.

3.    Balance sheet quality becomes so much more important in cycles like these. Already, we have seen the amount of AAA-rated government paper plunge 70% in the past three years from $19 trillion to $6 trillion. As such, emphasis on good quality corporate bonds in noncyclical sectors, attractive spreads, high net free cash flow yields, low debt ratios, high liquidity ratios and light refinancing calendars make prudent sense. Our good friend and top-ranked credit analyst Marty Fridson told me yesterday that even in the high-yield space, spreads off of government bonds have more than 100 basis points of tightening potential based on the current set of fundamentals.

4.    Always be on the lookout for assets priced for recession. Not only are wide swaths of the credit market priced for such, but so are parts of the commodity complex and segments of the ex-North American equity market where P/E ratios are in single-digits and PEG (P/E to growth) ratios below unity.

5.    In this post-bubble environment, policy rates will remain near the floor for years. As such, the risks of any sustainable bear market in bonds are very low since the cost of carry is so vitally important to the fixed-income markets, especially for longer duration product (keeping in mind that yield curves are still steep by historical standards).

6.    Keeping policy rates low means that real rates will remain negative. Even if the CPI turns negative, the central banks around the world will de facto ease policy by printing money. In this sense, the secular bull market in gold bullion remains intact and, as such, dips should be bought (especially dips below the moving averages).

7.    Global deleveraging cycles almost invariably bring on heightened geo-political tensions. This is why the oil price has such a high floor established underneath it. Protectionism will continue to emerge as a new normal, as part of the globalization trend gets reversed. Exposure to crude oil and materials makes good sense from a strategic point of view.

8.    Populist policies win the roost in these types of cycles. The 99% extract their pound of flesh from the 1%. Conservatives like Newt end up sounding like Krugman when debating the likes of Romney. Luxury retailing, or any other fashion that benefits from the spending trend of the upper class, is probably a good shorting opportunity.

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HedgeAccordingly's picture

ETF's are tying this market togther as well - individual stock arbitrage


LawsofPhysics's picture

"Deflation trumps inflation" - Wrong, lots of example throughout history where certain commodities that were essential to survival could not be found, for any price, while other unecessary "assets" went bidless (no buyers) and hence it was "deflationary".

Fuck you rosy.

The only way that these assholes can make such a statment is if price controls FORCE people to pay certain prices, oh wait, nevermind...

AC_Doctor's picture

LoP, great points.  Too bad all the PhD's have no fucking clue. 

BTW,  where is the RoboRoach at today when PM's are up?

Mr Lennon Hendrix's picture

At yoga class wearing a Lulumon unitard.

AC_Doctor's picture

LOL!  Don't forget his little pink fagbag!

ucsbcanuck's picture

Lulumon - is that the Jamaican version of Lululemon?

"Ya mon, it's my Lulumon"

SeverinSlade's picture

"If the American people ever allow private banks to control the issuance of their currency, first by inflation [monetary expansion] and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered." - Thomas Jefferson

Boilermaker's picture

Tying it all together....It's fucking rigged.

kito's picture

rigged to a giant dead sequoia hovering over the anthill tha is the u.s. economy, its still upright, but starting to teeter, as that the rope becomes ever more taut

CrashisOptimistic's picture

Rosenburg is consistently excellent in his analyses, but I have a big problem with this CONSTANT talk of deleveraging this and deleveraging that.

We Are Borrowing 1.2 Trillion dollars per year and paying off ZERO.

We'll be at 16 Trillion in debt on election day.  How in the NAME OF GOD can you call that deleveraging.  Society is ramping up debt, not ramping it down.

ghostfaceinvestah's picture

That's the way out monetary system works - debt has to continually grow.  So if the private sector won't grow debt, the government will do it for them.

GernB's picture

What goes up, must come down. It's not just physics, it's common sense.

CoolClo's picture

Common sense is NOT scientific...

Ropingdown's picture

Isn't there a question of which part of the economy is deleveraging and how?  Households are deleveraging, if that's the name for walking away from mortgages and credit cards.  House prices have deflated.  The government has massively inflated by spending our money and borrowing even more.  Aren't we still in a game of chicken?  It's unclear to me which way it will go, and it seems that the Fed has big doubts as well, given the 'ZIRP until 2014' language.  If the Fed gets lucky there will be enough nominal growth around the globe to save the national neck.  If there isn't, and if debt keeps turning bad,  deflation will cause an acceleration of bad debt and there will not be enough credit available to the government to keep playing the game.  I think it is unclear which outcome is more probable.  Other views?

AC_Doctor's picture

Declaration of Independence. 1776: All men are created equal and there are certain unalienable rights that governments should never violate. These rights include the right to life, liberty and the pursuit of happiness. When a government fails to protect those rights, it is not only the right, but also the duty of the people to overthrow that government. In its place, the people should establish a government that is designed to protect those rights.

Scalaris's picture

Declaration of Independence 1776 - 1871

USA Inc. 1871 - Present

Conrad Murray's picture

"Even if the CPI turns negative, the central banks around the world will de facto ease policy by printing money."


GernB's picture

They can supply credit, but who will borrow that money?

tarsubil's picture

If inflation is much higher than the interest rate on cheap gov credit, the elite 'in' classes will borrow the money.

tempo's picture

Bottom line after an hour of BS last night and an hour of more BS at 12:30 today, the FED has announced that there will be no recovery through 2014 as evidenced by their commitment to keep a ZIRP. This is not good news yet the futures jumped to near term highs (on low volume). If deficits are cut, the economy stalls, if interest rates are allows to market levels, the economy stalls. This is not good.

sabra1's picture

forget about the markets! it's all about the debts the globalists are buying! so, how much interest is everyone's bank account earning? gas at the pumps are being kept intentionally low, just until all the fema family fun centers are finished being decorated. then, massive inflation!!!

HD's picture

Algos do what they are told - to ramp. Once the market relizes the "bigger fool" is them - down we go...I hope.

Jerry Maguire's picture

If we "delever" in the usual fashion, as if the current situation was anything like normal, we'll be mired in bitter wealth confiscation from those who have little to begin with for a generation or more, and we'll still have to dump the bulk of it at the end.

Why do people not see this?

We need a jubilee.  Across the board.  It's not perfect, but there is no perfect solution to this mess.





Bonus points:



HD's picture

Don't kid yourself. TPTB would suck the very marrow from your bones before they would forgive a nickel.

Jerry Maguire's picture

They can't do anything about it if it's a constitutional amendment.  Ordinarily, a constitutional amendment of that kind would be a near impossibility.  But with the Occupy thing growing stronger, and needing some direction, if this is the direction it took it could be a game changer.

The whole idea of the constitution was to trump TPTB.

LouisDega's picture

 Who is this guy? 

s2man's picture

Why delverage when you can default?  Keep on borrowing!

"post-bubble environment"?  What?  The housing and credit bubbles only partially deflated. They are still being held aloft by the stock market, USD and TSY bubbles.  Once those last two pop, they will all be gone.  Poof!

jm's picture

If this is the case, which I believe, then bonds are not in a bubble and the dollar is king.

And Koo is right.


Texas Ginslinger's picture

If most of the new money Ben prints monetizes debt, then inflation will stay near his 2% goal, right..??

That the plan..??

AC_Doctor's picture

Too bad their inflation numbers do not include the ubiquitous food and energy elements that are pretty much non-essential for human life forms.

sabra1's picture

my plan is to hang around pre-natal wards! you can live on only boobie juice!

respect the cock's picture

Try the braised placenta and fava beans...divine!

Yen Cross's picture

 Starbucks next drink. " The Bernanke Latte". Would you like that EXTRA Frothy with SHIT sprinkles?

Goldilocks's picture


keep 'em comin' tyler (s) ';-)

Disco 70' - Andrea True Connection - More, More, More
http://www.youtube.com/watch?v=xTsTIS-8III (2:14)

TheSilverJournal's picture

The difference between now and the Great Depression is:

  • rates are already at 0%
  • government is backing most mortgages
  • entitlement programs are enormous
  • government debt is enormous
  • the main export of the US is the USD
  • the economy is 70% service sector

I wish things were looking as good as the Great depression.


Diet Coke and Floozies's picture

Don't forget that peak natural resources was many decades away...

HD's picture

We are much better off today...our soup lines will have wi-fi.

Sudden Debt's picture

- Now we have the internet which will spread the fear faster than ever before

- Peak commodities

- Obama

- Globalisme

- Much more to lose than people had to lose in the 30's

- Enemies all over the world just waiting for a weak moment


rosiescenario's picture

Well delivered...looks like more war and more printing are the only choices left...

AC_Doctor's picture

ouch, this will end poorly for the retired in Kalifornia.

Sudden Debt's picture

They can always catch some waves dude!

xela2200's picture

I hear you can rent a tent for cheap in Sacramento. Stealth camping is becoming a trend in Kalifornia too. You just need to get used to the celibate life.


Everybodys All American's picture

When this market blows up this going to be beyond anything we have ever seen.

SAT 800's picture

What do you care you couldn't make five cents off of it if I explained it to you twice.

OutLookingIn's picture

Most expect it to happen quickly, as in the very near term. Not so. The systemic failure has been ongoing for years. It is a gradual waterfall type of failure. As events both financial and geopolitical, push the globe closer to the final outcome, it will seem to happen quickly.

For all those that don't see it coming, as in "Wow that was a surprise!" Which pertains to the majority of the sheeple.

Just keep on stacking.   

RobotTrader's picture

Rosenberg yet another "expert"who failed and should be fired for gross incompetence.


10-year closing highs on QQQ today.

Rosie is among others are now "Dead Bodies" thrown under the bus.

So many of these guys greatly underestimated:

- The Power of Infinite Fiat

- The Power of TPTB

- The Outsized Ego of Ben Bernanke

Here's a list of the body bags:

1) Nic Lenoir

2) Paul Farrell

3) John Taylor

4) Hugh Hendry

5) Peter Tchir

6) Kyle Bass

7) Charles Hugh Smith

8) Bob Janjuah

9) Doug Casey

10)  And hundreds of others, most of which were showcased here on Zero Hedge as "Gurus"